Philippine Economy: Airline Liberalization Yields Greatest Number of Cheap Travel

Well this development is certainly a refreshing plus for the Philippine economy. 

The domestic airline industry’s liberalization has led to a boom in domestic tourism and has earned the Philippines plaudit as having the greatest number of cheapest air fare in the world.

From the Economist, (bold mine)

LOW-COST airlines like Ryanair and Southwest Airlines have swollen to formidable size in recent years by offering a very different approach to that of more traditional full-service airlines. With their single-class seating, range of ancillary charges and pared-down approach to all things aviation-related, these budget carriers have become a familiar, often bemoaned, feature of holidays and business trips around the globe. In British airports, for example, more than 50% of all passengers last year squeezed into seats on low-cost carriers. But Britain only comes seventh on a list ranking countries on that criterion. Figures released by Amadeus, a global travel distribution system, show that the Philippine aviation market has the greatest proportion of low-cost flyers. In that country of over 7,000 islands, 65% of all passengers used budget carriers last year. Cebu Pacific, the nation’s biggest low-cost operator, boasted over 46% of the domestic market. Among the smallest low-cost markets are Russia, Japan and China, where budget carriers accounted for just 5%, 4% and 1% of departures respectively. In China, the government keeps strict control of the airline industry and shields the three main state-controlled carriers (Air China, China Southern and China Eastern) from low-priced competition. Shanghai-based Spring Airlines, which launched in 2005, is the country's only low-cost carrier of any size.

Since the Philippine government has liberalized the airline industry in 1995, the entry of new players has prompted competition to drastically lower airfares which translated to a natural boom in the domestic tourism industry. Lowering the cost of airfare has allowed a greater number of people, across income and wealth strata, to enjoy the benefits of traveling.

Here is the current list of domestic commercial airlines from Wikipedia.org

Domestic tourism plays a big role in the tourism industry where spending share of local tourists accounts for 59.1% of the industry in 2011 as I earlier pointed out here.

Rather than blowing bubbles, real structural reforms on the local economy should be modeled after the Philippine airline industry.

As post-war free market reformist, former Chancellor of Germany Ludwig Erhard, popularly known to have ushered in "Wirtschaftswunder" or German for "economic miracle", wrote in his classic book Prosperity through Competition, page 1

Competition is the most promising means to achieve and to secure prosperity. It alone enables people in their role of consumer to gain from economic progress. It ensures that all advantages which result from higher productivity would eventually be enjoyed.

Indeed.

Is Hong Kong’s Free Economy a Myth?

Hong Kong has been known as the freest economy in the world.

But skeptics argue that such claims may not be accurate as Hong Kong’s capitalist political economy may have been shadowed by cronyism.

Writes Eddie Leung and Pepe Escobar at the Asia Times,

For the Heritage Foundation is a matter of routine to rank Hong Kong as the freest economy in the world - with a whopping overall score of 89.9 compared with a world average of 59.5. This Milton-Friedmanesque paradise is extolled for "small government, low taxes and light regulation".

Much is made of "business freedom" and "labor freedom". True - you can open a business in three days; you just need a Hong Kong ID, a form and US$350. But depending on the business, you will be squeezed by monopolies and oligopolies in no time. And if you are "labor", chances are in most cases you can only aspire to some sort of glorified slavery.

Heritage researchers may be excused for losing the plot between dinners at the Mandarin Oriental and partying in Lan Kwai Fong, both favored drinking and dining spots near the central business district. Behind all those luxury malls and the best bottles of Margaux, real life Hong Kong has absolutely nothing to do with a free economy encouraging competition on a level playing field. It's more like a rigged game.

The dark secret at the heart of Hong Kong is the unmitigated collusion between the government and a property cartel - controlled by just a few tycoons; the Lis, the Kwoks, the Lees, the Chengs, the Pao and Woo duo, and the Kadoories (more about them on part 2 of this report). These tycoons and their close business associates also happen to dominate seats on the 1,200-member Election Committee that chooses Hong Kong's chief executive…

We should be back again to a Chinese maxim: land is power. All the conglomerates controlled by Hong Kong tycoons are fattened on owning land. The local government is the sole supplier of land. So no wonder it keeps a vested interest in the property market - and that's a huge understatement - as it pockets fortunes from land sales and premiums on so-called "lease modifications".

As for the maxim that prevails across the city's property market cycles, it's always been the same: "Buy low and sell high".

Read the rest here.

Hong Kong has certainly not been an ideal laissez faire economy as no country in this world has been.

But rankings of economic freedom, whether by Heritage Foundation or by the Fraser Institute, has been relatively established and have not been measured on absolute terms.

It is also important to note that for as long as the distribution of any resources are politically determined, the natural outcome will be one of collusion, horse trading, favoritism and corruption.

Virtuous or moral government is an illusion more than Hong Kong’s free economy is a myth.

Government officials are human beings too limited by knowledge problem, cognitive biases, value preferences (determined by education, religion, culture, ideologies, family values and etc…), peer pressure, social standings, career ambitions and etc...

While some of Hong Kong’s wealthiest may have made their fortunes from cronyism (or politicized real estate policies), the above critics who resort to claims of “oligopolies and monopolies” that leads to “high prices land policy” and “glorified slavery” fails to recognize that Hong Kong’s property boom has also been influenced by the US Federal Reserve policies via the US dollar peg.

Also Asia’s increasing social mobility has been an influence to Hong Kong’s property market.

Hong Kong has been the second hottest property market in the world according to MSNBC.com

The growing wealth of mainland Chinese, coupled with China’s property restrictions, has led to an influx of mainland buyers into Hong Kong’s residential market in recent years. According to industry estimates, three in 10 deals in Hong Kong’s luxury property markets are done by mainland Chinese buyers.

Property restrictions too add to the politicization of Hong Kong’s real estate market.

Finally the above authors seem to have misunderstood the meaning of competition by which they ascribe to flawed neo-classical concepts of oligopolies and monopolies through “captive markets” or “limited competition”.

Let me quote the explanation of Austrian economist Dr. George Reisman (bold emphasis mine)

Actual price competition is an omnipresent phenomenon in a capitalist economy. But it is completely unlike the kind of pricing envisioned by the doctrine of "pure and perfect competition." It is not the product of a mass of short-sighted, individually insignificant little chiselers, each of whom acts to cut his price in the hope that his action won't be noticed by any of the others. The real-life competitor who cuts his price does not live in a rat's world, hoping to scurry away undetected with a morsel of the cheese of thousands of other rats, only to find that they too have been guided by the same stupidity, with the result that all have less cheese.

The competitor who cuts his price is fully aware of the impact on other competitors and that they will try to match his price. He acts in the knowledge that some of them will not be able to afford the cut, while he is, and that he will eventually pick up their business, as well as a major portion of any additional business that may come to the industry as a whole as the result of charging a lower price. He is able to afford the cut when and if his productive efficiency is greater than theirs, which lowers his costs to a level they cannot match.

The ability to lower the costs of production is the base of price competition. It enables an efficient producer who lowers his prices, to gain most of the new customers in his field; his lower costs become the source of additional profits, the reinvestment of which enables him to expand his capacity. Furthermore, his cost-cutting ability permits him to forestall the potential competition of outsiders who might be tempted to enter his field, drawn by the hope of making profits at high prices, but who cannot match his cost efficiency and, consequently, his lower prices. Thus price competition, under capitalism, is the result of a contest of efficiency, competence, ability.

Price competition is not the self-sacrificial chiseling of prices to "marginal cost" or their day by day, minute by minute adjustment to the requirements of "rationing scarce capacity." It is the setting of prices perhaps only once a year — by the most efficient, lowest-cost producers, motivated by their own self-interest. The extent of the price competition varies in direct proportion to the size and the economic potency of these producers. It is firms like Ford, General Motors and A & P — not a microscopic-sized wheat farmer or sharecropper — that are responsible for price competition. The price competition of the giant Ford Motor Company reduced the price of automobiles from a level at which they could be only rich men's toys to a level at which a low-paid laborer could afford to own a car. The price competition of General Motors was so intense that firms like Kaiser and Studebaker could not meet it. The price competition of A & P was so successful that the supporters of "pure and perfect competition" have never stopped complaining about all the two-by-four grocery stores that had to go out of business.

I agree that there have been accounts of cronyism in Hong Kong. But Hong Kong’s largely open economy has also been materially influenced by external forces (monetary transmission and mainland immigration and or speculation), focusing on one at the expense of the other only exposes of analytical bias and would signify a big mistake.

Thus to conclude that Hong Kong’s political economy has veered towards an oligarchic-monopolistic environment would “currently” seem exaggerated as there has been little evidence of the deficiency of price competition in the context of the promotion of efficiency, competence and ability.

I say “current” because Hong Kong seems to have taken the slippery slope towards China’s mixed economy (by the introduction of minimum wages) which may change the incumbent political economic setting.

Hong Kong may not be a laissez faire or classical liberal paradise, but relatively speaking, I don’t think that Hong Kong’s free market has been a myth, especially not when compared to the Philippines.

Quote of the Day: Challenging Monopolies

From excerpt from Forbes Magazine on how John Gokongwei owned Cebu Pacific [PSE: CEB] grabbed the airline industry tiara from Lucio Tan’s Philippine Airlines [PSE: PAL]. (emphasis mine)

It was Lance's father, legendary ragsto- riches entrepreneur John Gokongwei Jr., who had the idea to start Cebu Pacific. John, now 84, sits atop JG Summit Holdings, one of the Philippines' largest conglomerates, and a family fortune that FORBES ASIA pegged at $1.5 billion last year. His interest in aviation was piqued after reading about U.S. discounter Southwest Airlines at the same time the Philippine government decided to open up the airline industry. But Lance believes there was another layer to his father's interest: "About a year before we bid for PAL and lost. So when deregulation came up, well, my dad loves challenging monopolies."

Read more here

Monopolies, which signify as government privileges, operate on principles of anti-competition. This implies that monopolies are fundamentally inefficient, are driven by political goals and irresponsive to consumer demands which all add up to say that monopolies are slow to adapt to the changes in the marketplace.

And so when industries once dominated by monopolies are deregulated, this ‘chink in the armor’ becomes exposed. In a newly deregulated environment, entrepreneurs should pounce on the opportunities to challenge government monopolies as the Gokongwei’s did.

The Wonderful Effects of Deflation in the Telecommunication Sector

Telecom fees continue to fall almost everywhere.

Notably, the largest decline can be seen in developing economies. Yet in spite of this, developed economies still maintain the lowest rates.

From the Economist,

DEVELOPING countries still pay far more for communications than developed countries as a proportion of overall income. But over the past two years these services have become more affordable worldwide, according to the ITU (International Telecommunication Union). The ITU’s ICT price basket combines the average cost of fixed-line telephones, mobile phones and fixed-line broadband internet services, calculated as a proportion of gross national income per person. (Broadband is not shown on the chart because in countries where it is still rare, its high cost swamps the chart and makes it difficult to read.) Africa made the biggest gains. Of the countries covered, seven countries had overall price-basket declines greater than 50%, mainly because of declines in fixed broadband. Mobile-phone charges are higher in developing countries in part because many customers pay for calls using pre-paid scratch cards rather than via monthly contracts which include large "buckets" of calling time for which the effective cost per minute is much lower.

Developed economies have the natural advantage of having lower rates primarily because of accumulated wealth (capital stock) and high productivity.

This also shows that an industry once thought as “natural monopoly” has proven to be a myth.

As Professor Thomas DiLorenzo writes,

The biggest myth of all in this regard is the notion that telephone service is a natural monopoly. Economists have taught generations of students that telephone service is a "classic" example of market failure and that government regulation in the "public interest" was necessary.

The ITU seems reticent on why costs have been falling. Their narratives have mainly focused on the developments of falling prices rather than the essence of what makes cost of telecom services decline.

Nevertheless I’ll quote the ITU in 2008,

Market liberalisation has played a key role in spreading mobile telephony by driving competition and bringing down prices.

Lastly, telecom fees signify as great examples of what we shouldn’t be afraid of—deflation.

On the contrary, basic economics in the telecom sector has worked magnificently...

...where falling prices (arising from market based competition) equates to greater volume. This has translated to mass adaption by the public. Worldwide, there are 69 mobile subscribers per 100 people and growing. Chart from Google Public Data

To quote ITU’s Secretary-General Dr Hamadoun Touré

With ICTs now a primary driver of social and economic development, these results are highly encouraging...Our next challenge is to find strategies to replicate the ‘mobile miracle’ for broadband, which is fast becoming basic infrastructure. Countries without affordable broadband access risk falling quickly behind.

Well, the answer to the desire for "mobile miracle" in broadband should be the same dynamics that has made the above circumstances possible—market liberalisation!

Social Inequality: The Anatomy of Plutocracy

One of the most popular misimpressions or smear campaign tactics directed against free markets or laissez faire capitalism is that such a system promotes a political order known as plutocracy-or the rule of the wealthy.

This idea either lacks the comprehensive understanding of capitalism or simply operates on the premises of deliberate equivocation (propaganda).

The Consumer Reigns In A Laissez Faire System

In the laissez faire political economic order, it is the consumer that ALWAYS reigns supreme.

Consumers ultimately determine who to reward (by profits) and who to punish (by losses). Thus, the wealthy are those entrepreneurs who manage to continually satisfy the ever dynamic desires of consumers.

As the great Ludwig von Mises wrote, (bold highlights mine)

In the capitalistic society, men become rich — directly as the producer of consumers' goods, or indirectly as the producer of raw materials and semiproduced factors of production — by serving consumers in large numbers. This means that men who become rich in the capitalistic society are serving the people. The capitalistic market economy is a democracy in which every penny constitutes a vote. The wealth of the successful businessman is the result of a consumer plebiscite. Wealth, once acquired, can be preserved only by those who keep on earning it anew by satisfying the wishes of consumers.

In addition, market dominance is neither guaranteed nor in a state of permanence because consumer desires always changes.

Importantly, the highly competitive nature of markets impels entrepreneurs to attain excellence by exploiting windows of entrepreneurial opportunities.

As Professor Israel M. Kirzner writes, (bold highlights mine, italics Prof Kirzner)

What makes possible the entrepreneurially driven process of equilibration is active market competition. It is only the possibility of unrestricted entrepreneurial entry which permits more alert entrepreneurs to deploy their superior vision of the future in order to correct the misallocations of resources reflected in the false prices which characterize disequilibrium. It is the continual threat of such entry which tends to keep incumbent entrepreneurs alert and on their toes.

A good example of such process can be seen from how Apple, the technology behemoth company, has attained its present dominance.

Apple’s Sphere of Influence From Minyanville.com

Apple’s success wasn’t granted by fiat orders from political leaders but from its numerous attempts to satisfy consumer demands via competition derived innovative consumer friendly technology devices.

The above is an example of one of the many failed Apple products (chart and the rest of the story from Minyanville). In other words, Apple’s recent string of successes came at the cost of her previous failed experiences or experiments.

I have recently noted on how Mattel, makers of the famous Barbie dolls, has closed shop in China for failing to adapt to local tastes and how Philippine conglomerate Jollibee has captured the largest market share in the Philippine fast food industry by toppling US based counterpart McDonald’s by ingenously configuring her products to the palate of Filipino consumers.

The point is—the political economic order of the rule of the wealthy (plutocracy) would NOT sustainably persist or would unlikely occur under a pure laissez faire system.

State And Crony Capitalism Equals Plutocracy

The apologists for statism, who see Plutocracy as the main source for inequality, hardly realize that for the wealthy to politically sustain its dominance means to adapt ANTI-COMPETITIVE measures by co-opting with the political leaders.

Writes Art Carden (bold highlights mine)

Bourgeois riches come from customer service. Aristocratic riches are expropriated. Aristocracy rests on intrinsic value whereas capitalism rests on the exchange of value for value.

Libertarian William Graham Sumner wrote, (bold highlights mine)

[M]ilitarism, expansion and imperialism will all favor plutocracy. In the first place, war and expansion will favor jobbery, both in the dependencies and at home. In the second place, they will take away the attention of the people from what the plutocrats are doing. In the third place, they will cause large expenditures of the people's money, the return for which will not go into the treasury, but into the hands of a few schemers. In the fourth place, they will call for a large public debt and taxes, and these things especially tend to make men unequal, because any social burdens bear more heavily on the weak than on the strong, and so make the weak weaker and the strong stronger. ("Conquest of the United States by Spain.")

And it has not been different here in Southeast Asia, Joe Studwell writes, (as I earlier quoted here)

Centralized governments that under-regulate competition (in the sense of failing to ensure its presence) and over-regulate market access (through restrictive licensing and non-competitive tendering) guarantee that merchant capitalists-or asset trader, to use a more pejorative term-will rise to the top by arbitraging economic inefficiencies created by politicians. The trend is reinforced in South-east Asia by the widespread presence of what could be called as ‘manipulated democracy’, either in the guise of predetermined winner democracy (Singapore, Malaysia, Suharto’s Indonesia) or else in the scenario where business interest gain so close a control of the political system that they are unaffected by the changes of government that do occur (as in Thailand and the Philippines). In both instances politicians spend huge sums to maintain a grip on power that has some semblance of legitimacy. This can only be financed by through direct political ownership of big business or more usually, contributions from nominally independent big business that is beholden to politicians. Whichever, the mechanism creates a not entirely unhappy dependence of elites between politicians and tycoons.”

If Confucius once said that ‘give the man a fish you feed him for the day, teach him to fish and you feed him the rest of his life’.

From a political standpoint, libertarians and classical liberals advocates on the method that teaches the man how to fish, so as to make him productive to the society.

Whereas for statists, who along with politicians, will naively insist on feeding the man for the day (moment), by picking on someone else's pocket, supported by a legalized coercive framework that are enabled or facilitated by a politically constructed paper money system, which from the account of the entire history of man’s attempt to produce political nirvana has always failed.

Yet such accounts for exactly the Anatomy of Plutocracy.

Any political economic order which depends on political privileges or distribution of resources—endowments, protectionism, subsidies, bailouts, behest loans, economic concessions et. al. represents NOT a laissez faire system but a political system known as STATE CAPITALISM or CORPORATISM or CRONY CAPITALISM. The important difference is that consumers in a laissez faire system represents as real power, whereas politicians signify as the most powerful agents in the state capitalist order.

In today’s setting, the cooptation of the banking cartel-military industrial complex-green industrial-government labor union-welfare state-central banking system (in the US or elsewhere) are representative of PLUTOCRACY IN ACTION!

As the great Milton Friedman said in this lecture,

A society that aims for equality before liberty will end up with neither equality nor liberty. And a society that aims first for liberty, will not end up with equality but will end up with a closer approach to equality.

Bottom line: Statism or government interventionism, which enables or sustains a political economic order of plutocracy, is what engenders social inequality. The more societies politically organize herself towards attaining social equality, the more inequality gets amplified.

Here, noble intentions and economic reality are separated.

Example of How the Web Neutralizes Propaganda

At the Library of Economics and Liberty Blog, Professor David Henderson writes about the psywar recently employed by the US government through the New York Times.

He writes,

Glenn Greenwald has an excellent piece telling us what the New York Times essentially told us if anyone cared to notice: the New York Times admits that it enabled the U.S. government's lying about a CIA agent in Pakistan named Raymond Allen Davis.

The U.K. newspaper, The Guardian, broke the story but stated that some U.S. newspapers were aware of the facts too but hadn't disclosed them. The New York Times fessed up. Its reporters, MARK MAZZETTI, ASHLEY PARKER, JANE PERLEZ and ERIC SCHMITT, wrote:

“The New York Times had agreed to temporarily withhold information about Mr. Davis's ties to the agency at the request of the Obama administration, which argued that disclosure of his specific job would put his life at risk. Several foreign news organizations have disclosed some aspects of Mr. Davis's work with the C.I.A.

This exactly is what we talked about in The Web As Foundation To The Knowledge Revolution. I noted that

1. Government’s traditional medium in disseminating its political agenda has been through mainstream media. (Here, the New York Times)

2. Government will try to censor and manipulate information flow but will be negated by competing sources. (here, UK’s Guardian exposes the New York Times)

3. Democratization of knowledge or competing sources through the web has been responsible for the neutralization of propaganda.

Professor Henderson opens with this striking statement:

“Thank goodness for international trade and the web.”

We will see more of this in the future.

Competition Brings About Economic Growth

In an article, “Greater competition in mobile providers accelerates business growth in Solomon Islands” the World Bank writes, (bold highlights mine)

The introduction of a new mobile phone provider earlier this year has significantly reduced call costs in Solomon Islands.

More people now have access to cheaper telecommunications services, resulting in business growth due to better access to market information.

The multilateral 'government' institution admits that competition is the essence of business and or economic growth.

As Friedrich A. Hayek wrote in The Meaning of Competition

Competition is essentially a process of the formation of opinion: by spreading information, it creates that unity and coherence of the economic system which we presuppose when we think of it as one market. It creates the views people have about what is best and cheapest, and it is because of it that people know at least as much about possibilities and opportunities as they in fact do. It is thus a process which involves a continuous change in the data and whose significance must therefore be completely missed by any theory which treats these data as constant

In a competitive society, everybody’s opinion counts because they are expressed through the markets. And competition brings out the best in men, mostly for the benefit of society.

Can Government Prevent Disasters?

I am disheartened by the news of the recent bus tragedy in Benguet whereby some 41 people died when the Bus fell into the ravine.

Yet we hear some sectors intuitively propose government to intervene, in the assumption that government can indeed forestall disaster. Again “romancing the government” without examining the cost benefit tradeoffs.

Here is why I think government can’t help in preventing disasters, (even if you install a communist government)

1. Government officials don’t know and can’t tell the future.

2. Government officials don’t know and can’t tell ALL the ongoing changes in the environment.

3. Government officials don’t know and can’t tell ALL the spontaneous actions of tens of millions of people.

4. Government officials don’t know and can’t tell ALL the conditions of the vehicles that people use.

5. Government officials don’t know and can’t tell ALL the impact of the interactions of the people, the vehicles and the environment.

In short, it will ALWAYS BE A KNOWLEDGE problem.

So unless, someone can enlighten me on the supposed omniscience of government, from such premises, no matter what the government does, they won’t be able to prevent disasters.

At worst, they could enhance it.

How?

First, every government intervention entails a bureaucracy.

Two, every bureaucracy comes with financing charged to taxpayers. So if the government plans to reduce accidents by having people NOT to travel by imposing onerous taxes, then this would be the way to go. That’s because people will be too poor to travel. Yet quality of life can be associated with impact of disasters (Think Haiti)

Three every regulations will benefit one group at the expense of the other.

A great example of this would be the Philippine Maritime industry.

Out of the world’s 176 worst maritime disaster, the Philippines owns 6 of them and has the inglorious status of having the worst, the MV Dona Paz.

Well, it’s NOT that the maritime industry has been lacking regulation. The fact is the opposite the industry have SATED with regulations.

As I previously wrote,

It is a peculiar development why despite the repeated accidents by the same shipping company, consumers continue to patronize such private entity. The answer is the lack of choice.

None in the media has brought out the fact that the domestic shipping industry is a very tightly regulated industry.

Imagine, aside from 5 agencies that directly supervise the industry; namely, Maritime Industry Authority, Philippine Ports Authority, Bureau of Customs Bangko Sentral ng Pilipinas and the Philippine Shippers Bureau, there are another twenty six (26) other agencies directly or indirectly regulate the inter-island freight shipping industry (NEDA’s Philippine Institute for Development Studies). Incredible red tape!

THIRTY ONE Agencies regulating the Shipping Industry yet the repeat disasters?! Why?

Because the bureaucratic red tape has served as a substantial barrier from competition to the benefit of the incumbent industry players.

And when consumers have been left with no choice, they will be forced to patronize even when the services offered are inferior or when their lives are put to risk. Ergo, the repeat disasters.

Another, there is such a thing called “regulatory capture”. It’s when the interests of the industry have “captured” the regulators, or when regulators and the protected industry dance the proverbial tango.

In many instances, regulators find their career outside public service in the industry which they once regulated. In short, the interest of the regulators tends to align with the interest of the regulated for personal motives such as career or otherwise. (As I said regulators are HUMAN Beings and look after their personal interest FIRST). Thus, by keeping chummy they open the doors for laxity in supervision and risk of disasters.

Four, regulators are obsessed with rules and NOT with pleasing the consumers. Yet rules don’t and won’t incorporate everything that is known for the benefit of society. The fundamental premise of which anew is the Knowledge problem and of the interest of diverse groups involved in shaping the laws.

So instead of looking for the welfare of their clients or the consumers, industry providers will be forced to pay attention FIRST to comply with the web of laws.

And the cost of compliance is the obverse side of disaster, industry players tend to stick by the standards (regulations) and ignore the cost of a potential disaster from a black swan or a random event.

Remember life is dynamic, new technology, environmental changes and evolving consumer patterns among others contribute to “randomness”. Even new laws contribute to changes in people’s behaviour, which add to randomness or life’s complexities.

At the end of the day, if an accident from a black swan event happens, then the industry players can go scotch free since they are outside the ambit of government imposed standards.

Of course, unless consumers are deemed to be so dumb, then always the excuse for government intervention.

But in contrast to this, consumers can always be empowered to render discipline on the providers, if given the chance.

That is if they allow competition to determine their cost-benefit tradeoffs relative to the price, quality and safety of the product they use or consume.

It’s funny and an irony how we tend to TRUST the people to make the “right” choices about the leadership in elections, yet degrade their capabilities when they account to choose for their own self-interest which they have a direct stakeholding, when dealing with personal needs and wants. It’s a reasoning gone backwards.

Another, outside regulations and the consumers, the other source of discipline are tort laws. If the judicial system will be facilitative into rendering judicious resolution and indemnity to the aggrieved parties, then obviously no business interests would in the right mind NOT to seek the interest of the consumers because they will and can be sued out of existence.

In short, you don’t need more government intervention, what you need is more competition and judicious facilitation of tort laws.

___
Update:

I’d like to thank Nonoy Oplas for his most valued input (see comment section).

Nevertheless, let me clarify that the Jeepney industry can’t be classified as an open competition but a regulated competition. As an analogy, if you have (x number of) pets in a cage and throw food into it, your pets will “compete” for the food you throw. There is “competition” but the competition is limited by your actions (as pet owner), or in the case of the Jeepney, the government.

Jeepneys are essentially covered by a slew of regulations, these includes franchise restrictions, territorial coverage, allowable fees to charge (public tolls), vehicle type and engine specifications, road use, traffic regulations—the latter, of which are vacillatingly implemented, and perhaps many more (this would need to be researched and a topic for another day).

Thus, I wouldn’t generalize that discourteousness of many Jeepney drivers as a result of “competition” but from a combination of many of these regulations which has skewed the behaviour of drivers towards “incivility”.

One shouldn’t forget the uneven application and occasional boorish behaviour of the implementing officers and notwithstanding the “palakasan” attitude as a result of political dependence could also be contributing factors. So there are many many many factors influencing the Jeepney industry.

Since buses have “higher barriers to entry”, one might say they seem more professional in competition. But I have my reservations. This needs more research before making any conclusions. Some like Victory Liner which has been a favourite of mine seem to respond to “competition”.

The transport sector is more a regulated competition than a free market competition. Hence, the beneficial effects from competition may NOT be apparent, since they are suppressed.

Of course, in agreement with Nonoy's suggestion, open competition, the abolishment of government agencies, facilitation of the tort laws, and the rule of law should matter most. One can use the this experiment as example.

The New Trading Platform Of The Philippine Stock Exchange

``There’s a simple and elegant test of whether there is skill in an activity: ask whether you can lose on purpose. If you can’t lose on purpose, or if it’s really hard, luck likely dominates that activity. If it’s easy to lose on purpose, skill is more important.” Michael J. Mauboussin

Mayhem struck the Philippine Stock Exchange (PSE), this week. What was expected to be a smooth transition in the migration of the old MakTrade system to the New Trading System turned out to be quite messy.

Aside from the erroneous data feed which resulted to a whopping one day 14% jump in the Phisix on the first day of the new system, news reports say that it took more than three hours[1] to correct the figures in the benchmark index.

The glitch wasn’t just seen in the major benchmark figures. This extends all the way to the data, particularly on the daily quotes. Previous computations for foreign trade seem to have been altered, so as with the breadth (daily number of issues traded-formerly sum of advance, decline and unchanged issues), this I would have to clarify with the PSE.

So unless the PSE resolves to align this week’s quote with the past, the new system will render our previous data as invalid.

Though this is a technical issue which eventually should be resolved, I am not sure how the PSE will make good the right adjustments, considering that it could be costly to reprogram (if this is included in the package).

In addition, the posting of the daily quotes at the PSE website has been way delayed. The quote for July 30^th trading session had been uploaded only this morning, August 1^st.

The Unseen Cost Of Inefficiencies

Meanwhile, a PSE official, quoted by media, rushed to exculpate the disorderly transition by insensibly claiming that such transition represents as a mere “minor” issue and emblematic of normal “birth pains”. This is not only ridiculous, but is unwarranted.

Such statement exemplifies on what we call as the stakeholder’s problem—where the urgency to know and act is fundamentally based on the perceived stake by the agent involved.

In this case, because the officer’s stake isn’t in the trading business, but as an employee of the PSE, his sentiment reveals of the seeming paucity in the urgency to patch up the system, as well as, the undeserved insensate remarks.

One should realize that distortions in the price signals engender imbalances in the capital markets.

This includes an increase in the perception of operational uncertainty which could result to heightened volatility, the expanded risk premium of holding local equities relative to other local and foreign assets, higher cost of transactions and a higher hurdle rate required by both local and foreign institutional investors for them to consider allocating their funds to Philippine equities.

In short, uncertainty translates to the risks of lesser investments!

Proof of this is that even if the Phisix bellwether did register a marginal gain this week, the average volume fell by 13% (Php 2.9 billion) and the average number of daily trades fell by 23%!

So when we are talking of billions of pesos per day (estimated at Php 3 billion or US $66 million), “minor” problems and “birth pangs” translate to Php 100 millions+ (US $2.2 million) lost in daily transactions. Think of all the multiplier effect from the lost transactions applied to the participants and to the PSE itself.

Figure 1: Bloomberg: Year To Date Performance Of The ASEAN 4

I would even suggest that the underperformance of the Phisix relative to our ASEAN neighbours amidst a seemingly sprightly market backdrop (see figure 1) could signify as the unseen ‘negative’ ramifications from the “birth pains” (see blue circle).

Except for Malaysia (orange), all three major ASEAN bourses have broken above the 2010 resistance levels, and this includes the Philippine Phisix (green). However the rally in the Phisix appears to have stalled while the others persisted.

So the lost opportunities in terms of trading volume and a higher Phisix level could have been the side effect of the unwieldy migration to the new system.

New Trading System Positioned For Derivatives Markets

The New Trading System (NTS) reportedly cost a staggering Php 197.39 million[2] (US $4.32 million-current exchange rate) whose trading platform is supposedly designed from one of the world’s largest stock market companies. According to the Inquirer.net[3],

``trading software product developed by NYSE Technologies SAS, the commercial technology unit of NYSE Euronext, which in turn operates the largest exchanges around the world including the New York Stock Exchange and Euronext.”

By concept, the NTS or the new platform seems promising, primarily because it is supposedly a system that would also service “cash, debt and derivative instruments”.

Among the major ASEAN bourses, the Philippines is a laggard in the derivatives markets as we have yet to implement one through the local stock exchange. Hence, the understandable shift to incorporate a trading platform that would allow for this expansion.

In other words, the New Trading System (NTS) is meant to position for a derivatives exchange market and not just the stock exchange.

By allowing investors the instrument to hedge, which is the main function of derivatives, this facility could enhance investor returns, which should ultimately attract more public participation.

Figure 2: Manila Bulletin: NTS Revised Ticker and Board Lot

There are many salient trading enhancements in the new program. This includes the adoption of a reduced tick size (price fluctuation) and board lot[4] (see figure 2); real-time monitoring of foreign ownership; new order and validity types; and the standardization of the account code[5].

I think some of the most noteworthy, among the many supposed new functions[6], that could be widely used are the following:

-stop order which consists of the stop-loss [order that is queued as a must be filled as soon as the trigger price is reached] and the stop limit [order that is queued as a limit order as soon as the trigger limit price is reached]

-market order [order that is filled irrespective of the price whereby the unfilled quantity will be queued into the order book.]

-market to limit order [order executed at the best opposite price for shares whatever is available; remaining unfilled quantity will be put in the order book at the execution price]

-good till date [order remains valid until the date specified by the user]

So in my view, the transition towards NTS, given the specified features, should extrapolate to a medium to long term advantage, if the PSE would use this platform to expand into financial derivatives, and most importantly, to the much needed commodity futures market.

As a side note, because of the dire lack of capital in the Philippines, despite being a relatively low wage low export country, a large part of the Philippine economy remains mired in the agricultural age. Thus, a commodity futures market should enhance pricing, logistics and distributional efficiency that should positively impact our farmers, as I have long been arguing[7] for.

In short, since I am not a Luddite (political zombies who are afraid of technological adaption), but one who embraces innovation, the NTS, based on its current features, looks enticingly positive.

How Competition Can Improve On The PSE

However, what I have cavilled about is the executional inefficiencies and the lack of sensitivity by the PSE in the migration process.

The PSE should have backtested the new platform with the MakTrade system into near precision first before formally replacing the latter that would have resulted to an orderly transition.

Birth pains serve as no justification in today’s transition towards the information age. Yet if such reasoning holds true, then technology ‘birth pangs’ should translate into catastrophic crashes for the new airplane models as the Boeing’s 787 Dreamliner and the Airbus 380. Such rationalization is effectively a non-sequitur.

Instead, what these shortcomings manifest are symptoms of companies operating, outside of the discipline of consumers (or shareholders in this setting) in a monopolistic environment, which technically is what the Philippine Stock Exchange is.

As Professor Murray N Rothbard explained[8] (bold emphasis added, italics- Professor Rothbard)

``One form of partial product prohibition is to forbid all but certain selected firms from selling a particular product. Such partial exclusion means that these firms are granted a special privilege by the government. If such a grant is given to one person or firm, we may call it a monopoly grant; if to several persons or firms, it is a quasi-monopoly grant. Both types of grant may be called monopolistic. An example of this type of grant is licensing, where all those to whom the government refuses to give or sell a license are prevented from pursuing the trade or business.

``It is obvious that a monopolistic grant directly and immediately benefits the monopolist or quasi monopolist, whose competitors are debarred by violence from entering the field. It is also evident that would-be competitors are injured and are forced to accept lower remuneration in less efficient and value-productive fields. It is also patently clear that the consumers are injured, for they are prevented from purchasing products from competitors whom they would freely prefer. And this injury takes place, it should be noted, apart from any effect of the grant on prices.”

And according to former PSE President Jose Yulo Jr.[9]

``On March 4, 1994 the Securities and Exchange Commission granted the Philippine Stock Exchange, Inc. its license to operate as a securities exchange in the country stating that “a unified Stock Exchange is vital in developing a strong capital market and a sustainable economic growth.” It simultaneously canceled the licenses of the MSE and the MKSE.

``The Philippine Stock Exchange is currently the only organized exchange in the Philippines licensed for trading stocks and warrants.” (emphasis added)

So while it is true that stock exchanges of Thailand, Malaysia, Taiwan and Korea are monopolies in a sense (all others have multiple stock exchanges[10] including Pakistan), we see these organizations as more sensitive to the interest of the shareholders due to a deeper penetration level which make them a lot more efficient than the local contemporary.

That’s because shareholders exert pressure on listed companies as well as through the stock exchanges in terms of participation and through shareholder activism—or the use of equity stake to influence corporate management.

And a deep penetration level of shareholder’s base would naturally impact the way the exchange business are operated.

Besides, since the Philippines has a minute shareholder base[11] (less than 1% of the population direct and indirect) and whose listed companies are mostly companies owned by local tycoons, the lack of minority shareholder activism is one of the contributing factor that accentuates the negative dynamics of the monopolistic structure.

Figure 3: ADB[12]: Average Foreign Holdings of Equity—2003 to 2007 and 2008 (as % of market capitalization)

Another possible variable is the competition to attract foreign investors (see figure 3).

As one would note, except for Malaysia, the other monopolist Korea, Taipei and Thailand comprise the largest in terms of the average share of foreign participation as a percentage of the market capitalization.

This means that the respective markets are seen as highly liquid or has deep public participation levels, are considered sophisticated and shareholder friendly enough to generate large following from foreign funds.

Thus, inefficient management of the trading platform will curtail the interest of foreign investors to the detriment of the economy (lack of avenues to intermediate savings and investment) and to the investment public (returns relative risks).

So the PSE management should not only look slough off the monopolistic attitude, and on the competitive side work to attract investors by having more efficient implementation and a stable upkeep of the trading platform, but likewise have a PR communiqué that won’t be seen as snooty.

As a long time shareholder of the company, which is my expression of optimism for the Phisix and for the domestic capital markets, I hope that this critique would be deemed as constructive enough to make the PSE a more shareholder (market) friendly institution.

---

[1] Inquirer.net, New system throws Philippine bourse into disarray, July 27, 2010

[2] Philippine Stock Exchange, Security Exchange Commission Form 17-A, May 17, 2010

[3] Inquirer.net, loc. sit.

[4] Manila Bulletin, PSE implements new trading system, July 25, 2010

[5] Business Mirror, SEC approves PSE shift to new trading system, April 26, 2010

[6] Philippine Stock Exchange, NTS Update Session 1, October 2008

[7] See A Prospective Boom in Philippine Agriculture! and see Rice Crisis: The Superman Effect And Modern Agriculture

[8] Rothbard, Murray N. Triangular Intervention: Product Control, Man Economy & State Chapter 12

[9] Yulo, Jose Luis U. Jr. Knowing The Philippine Stock Exchange A guide for Investors

[10] tdd.lt Stock Exchanges Worldwide Links

[11] Philippine Stock Exchange, Less than half of 1% of Filipinos invest in stock market, PSE study confirms, June 16, 2008

[12] Asian Development Bank, Asia Capital Markets, May 2010

More Competition Via Deregulation For The US Electricity Industry?

The electricity market in the US appears to be opening up, that’s according to Energy biz editor Ken Silverstein, (bold emphasis added)

“While retail deregulation has fallen short of its promises, wholesale markets where industrials buy directly from generators are opening up. And the subsequent efficiencies are benefitting smaller consumers, who are also expected to see added improvements once their providers implement smart grid technologies that maximize efficiencies.”

And a genuine “deregulation” should translate to more competition. Adds Mr. Silverstein, (bold emphasis mine)

“Despite strong sentiments on both sides of the restructuring debate, it is too late to reverse directions in the wholesale market. That's because of the existing investments in unregulated generation and the sales efforts built to support that. The goal then is to create a fair market that enforces equal access to the grid and allows at least big buyers a choice in the matter. Any efficiency gains would then be passed down to smaller users.

“Deregulation has not been the panacea that supporters had hoped. But it is impractical to reverse course, particularly since customers are still switching.

“Under regulation, ratepayers may bear the risk of mistakes resulting from where and how investments are made. In competitive markets, however, the penalties for such mistakes fall on management and shareholders. Such accountability leads to better results, say proponents of deregulation, adding that the transition period from the traditional regulatory model to robust competitive markets takes time.”

Some comments:

The industry appears to be responding to the dictates of consumers more than the political supporters of a closed industry.

Perhaps this has been due to the ratchet effect or the “tendency of people to be influenced by the previous highest (or best) level of a factor (variable)” from the previous attempt to deregulate.

Next, this is exactly the difference between free markets and socialism: the profit and loss incentive versus collective risk taking.

Another, technology appears to be a critical factor in helping push consumers to demand for more competition.

Mr. Silverstein anew,

``The most significant catalyst for more efficient retail and wholesale energy markets will be less about new rules and regulations and more about technologies centered on the smart grid that can provide enhanced services and cleaner options. Utilities that incorporate those tools will, indeed, enjoy more competitive positions.”

If the trend towards more competition via deregulation is true, then this area should be a bright spot in an otherwise bleak- “socialization” of the US.

How Free Markets In The Telecom Industry Aids Economic Development

The global telecom industry best exemplifies how competition spurs economic development.

The growth in mobile use has been phenomenal; some 5 billion people are expected to be subscribers by the end of 2010- that's about 75% of the world population!

And mobile broadband (internet) takeup is also expected to exceed a billion users from 600 million as of 2009!

What makes this astounding is that the gist of the growth has been in the developing or poor economies. In short the poor is benefiting from free trade!

The following charts are from the World Bank's Development Indicators....
And that's because competition has prompted for a sharp decline of prices or fees for mobile services.

In short, the wonders of competition and technology based DEFLATION! (Darn the mainstream for painting deflation as evil)


And lower prices has attracted widespread demand which has led to this astounding growth!


These are emblematic of basic economic laws at work.

Competition drives prices lower, lower prices prompts for more demand, and finally widespread use indicates enhancement to people's lifestyle via enhanced connectivity, greater access to information, the lowering of transaction costs, more efficient markets, greater market breadth, influences on how politics are being shaped, introduces new services and importantly, more prosperity.

So in contrast to protectionists, who are so naively averse to competition and blame everything else to globalization, when domestic policies (bubble policies, regulatory quirks and bias, protectionism, cronyism and statism) have been the culprit for their woes, competition is and will be a MAJOR plus.

Proof?

This magnificent article from Jenny C. Aker and Isaac M. Mbiti of the Boston Review (hat tip: Mark Perry)

[bold emphasis mine]

``There are some good reasons to believe that mobile phones could be the gateway to better lives and livelihoods for poor people. While some of the most fundamental ideas in economics about the virtues of markets assume that information is costless and equally available to all, low-income countries in sub-Saharan Africa are very far from that idealization. Prior to the introduction of mobile phones, farmers, traders, and consumers had to travel long distances to markets, often over very poor roads, simply to obtain price (and other) information. Such travel imposed significant costs in time and money.

``Mobile phones, by contrast, reduce the cost of information. When mobile phones were introduced in Niger, search costs fell by half. Farmers, consumers, and firms can now obtain more and in many cases “better” information—in other words, information that meets their needs. People can then use this information to take advantage of arbitrage opportunities by selling in different markets at different times of year, migrating to new areas, or offering new products. This should, in theory, lead to more efficient markets and improve welfare.

``An emerging body of research suggests that perhaps theory is meeting reality. In many cases, these economic gains from information have occurred without donor investments or interventions from non-governmental organizations. Rather, they are the result of a positive externality from the information technology (IT) sector.

``In Niger, millet, a household staple, is sold via traditional markets scattered throughout the country. Some markets are more than a thousand kilometers away from others with which they trade. The rollout of mobile phone coverage reduced grain price differences across markets by 15 percent between 2001 and 2007, with a greater impact on markets isolated by distance and poor-quality roads. Mobile phones allowed traders to better respond to surpluses and shortages, thereby allocating grains more efficiently across markets and dampening price differences. Mobile phone coverage also increased traders’ profits and decreased the volatility of prices over the course of the year.

``The benefits of mobile phones are not limited to grain markets or to Africa. Robert Jensen, a UCLA economist, found that in the Indian coastal state of Kerala, mobile phones reduced price differences across fish markets by almost 60 percent between 1997 and 2001, providing an almost-perfect example of the “Law of One Price”: when markets work efficiently, identical goods have the same price. Even more impressive, mobile phones almost completely eliminated fisherman’s waste—the catch left unsold at the end of the day—by allowing fishermen to call around to different markets while at sea, choose the market with the best price, and sell accordingly. Mobile phones resulted in welfare improvements for both fishermen and consumers: fishermen’s profits increased by 8 percent, and consumer prices declined by 4 percent."

The article further deals with how the free market in telecoms has influenced improvements to education, health services, financial transaction (mobile banking) and governance (vigil on corruption).

Read the rest here.

Applied to the Philippines, mobile subscribers are estimated today at 72.8 million, according to the Streetinsider.com, or about 80% of the entire population!

Yet popular mobile usage is helping facilitate the introduction of new services as financial intermediation or mobile banking.


Where a big segment remains unbanked, mobile banking is helping to close this gap.

Writes the McKinsey Quarterly,

[bold emphasis mine]

``In the Philippines, for example, mobile-subscriber penetration is almost 80 percent, but banking penetration is only around 35 percent, leaving 21 million mobile subscribers with no bank account. If operators in the Philippines could bring mobile-money penetration rates among the unbanked into line with those achieved by best-practice operators elsewhere, they could acquire four million to five million new customers and add two to three percentage points of growth to their revenues. And these numbers don’t include earnings on loans and deposits, which we conservatively estimate could be a further $60 million to $80 million. Introductory mobile-money services also set the stage for additional cross-selling and up-selling in the future. In addition, eight million unbanked people in the Philippines don’t have mobile phones, and mobile money could make phone subscriptions more attractive to this segment."

From the development aspect, it is worthwhile to repeat that competition impacts the world in general positively.

In terms of investment, in the Philippines, industries that revolve around the growth of mobile banking should be a worthwhile field to consider.

The Final word from Friedrich August von Hayek,

``Competition is essentially a process of the formation of opinion: by spreading information, it creates that unity and coherence of the economic system which we presuppose when we think of it as one market. It creates the views people have about what is best and cheapest, and it is because of it that people know at least as much about possibilities and opportunities as they in fact do. It is thus a process which involves a continuous change in the data and whose significance must therefore be completely missed by any theory which treats these data as constant."

Yes, the telecom industry is essentially validating Hayek.